GNRC - NYSE

Good day, and thank you for standing by. Welcome to the First Quarter 2023 Generac Holdings Inc. Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Mike Harris, Senior VP, Corporate Development and Investor Relations. Sir, please go ahead.

Good morning. And welcome to our first quarter 2023 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time-to-time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable US GAAP measures is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone. And thank you for joining us today. Our first quarter net sales adjusted EBITDA and adjusted EPS were higher than expected, primarily due to continued strong shipments of our commercial and industrial products globally. Adjusted EBITDA margins were also better than expected due to favorable price cost dynamics. Additionally, field inventory levels of home standby generators declined at a rate consistent with our expectations in the quarter. Year-over-year, overall net sales decreased 22% to $888 million, and core sales declined 24% during the quarter. Residential product sales decreased 46% as compared to a strong prior year quarter. That includes the benefit of significant excess backlog for home standby generators, and was also impacted by elevated levels of field inventory for home standby generators as well as a decline in clean energy products. Global C&I product sales increased approximately 30% to an all-time quarterly record, with strength in most regions internationally, and all channels domestically. Adjusted EBITDA margin was negatively affected by significant unfavorable sales mix, and reduced operating leverage, driven by lower home standby shipments and continued energy technology growth investments. These margin headwinds were mostly offset by favorable price cost dynamics. Now discussing our first quarter results in more detail, while home standby shipments declined significantly in the quarter leading indicators of demand for the category were exceptionally strong during the first quarter. Baseline power outage activity in the U.S. was well above the long-term average during the quarter, with several larger localized outages in multiple regions, marking the highest level of baseline power outage activity for our first quarter since we began tracking outages in 2010. Home consultations or sales leads were up significantly over the prior year period with broad-based growth experienced in almost all states. Additionally, home consultations were approximately flat sequentially during the quarter, which is highly unusual for the seasonally softer first quarter, particularly as we're coming off of a record fourth quarter, and this strength continued in the month of April. For historical perspective, first quarter home consultations were more than four times higher than the comparable period in 2019, supporting our belief that the home standby generator category has reached a new and higher baseline level of demand. Our residential dealer count was more than 8600 at the end of the quarter, an increase of over 500 dealers from the prior year. While this is a slight decline on a sequential basis due to seasonal headwinds, we expect our dealer count to grow significantly over the coming years as we continue to focus on expanding our installation bandwidth. Activations, which are a proxy for installs were impacted by severe weather in multiple regions and declined slightly from the prior year period, which included a challenging comparison in the South Central region that saw notable strength in the prior year due to the backlog of activations related to the Texas deep freeze in 2021. The number of home standby generators and field inventory continued to decline towards more normalized levels during the first quarter, with the number of units falling meaningfully and ending the quarter approximately in line with our prior expectations. Days of field inventory relative to historical norms also decreased sequentially in the quarter but remained elevated. We expect field inventory to decline further in the second quarter, resulting in another quarter of lower home standby orders and shipments relative to the higher end market demand. Before returning to more normalized levels as we enter the second half of the year. Our initiative to increase home standby generator installation capacity remains a top priority for the company. We’ve recently launched our dealer talent network, which is showing early signs of momentum as we help our dealers find the talent needed to successfully grow their businesses. We also recently announced a partnership with the independent electrical contractor’s trade group, and this further elevating the Generac brand within the electrical contractor community and providing additional training resources in key markets, including Texas and Florida. Additionally, we have identified a number of project management improvement opportunities that we believe can help dealers optimize overall project timelines, in addition to several product related enhancements, to further simplify the installation process. These initiatives are not only focused on solving near term installation capacity challenges, but are also designed to provide sustainable solutions for tighter skilled labor markets. We believe these solutions as well as continuing to expand overall distribution could further increase Generac’s competitive advantage given our unparalleled scale, focus and expertise in the home standby market. Consistent with the comments provided on our fourth quarter earnings call in mid-February, we expected the first quarter mark the trough for home standby shipments in the current channel destocking process. We continue to anticipate a return to year-over-year sales growth in the second half of the year, as field inventory returns to more normalized levels. The above average outage environment and robust growth in home consultations thus far in 2023, further support this expectation. The range of threats that utilities and grid operators face was on full display in recent quarters, as the outage environment has been driven by severe weather, power supply shortfalls and unanticipated spikes in demand. Outage events are no longer limited to one off major storms. And as reliance on electricity continues to grow, consumers and businesses have demonstrated that they are less willing to accept the deteriorating level of power liability, and they're taking actions to improve their own resiliency. I'd now like provide some commentary on our residential energy technology products and solutions. While we're facing temporary headwinds for our residential clean energy offerings, our commitment to success in these markets has not changed. This strategically important area of our business gives us access to a number of highly attractive market opportunities that are supported by strong end demand and further reinforced by unprecedented levels of policy support. We expect this to combined serve the addressable market for residential solar MLPEs, storage, EV charging, home energy monitoring and management and grid services will grow at strong double digit CAGR through 2026, resulting in a domestic market opportunity of more than $10 billion. During the first quarter, shipments of power cell energy storage systems remained under pressure as we continue to rebuild and add to our distribution for these products, following the loss of a large customer that cease operations in the third quarter of last year. Additionally, we continue to make good progress on our SnapRS upgrade campaign in the quarter. And we remain committed to taking care of our customers and the channel partners that are participating in this program. In addition to our residential storage efforts, our energy monitoring and management capabilities remain well positioned as positive momentum and ecobee’s device sales, together with a number of product awards, that resulting in continued market share gains. And highlight the consumer appeal of our feature rich smart thermostat offerings. Ecobee’s already strong customer satisfaction scores have improved further since the 2022 release of our latest generation devices, validating ecobee’s expertise and user interface and user experience development. We're heavily leveraging that expertise in our single pane of glass initiative, which will act as the central hub of our residential energy ecosystem. It's also worth noting that customer interest in our grid services offerings remain strong with another quarter of robust sales growth off of a low prior year base. We’ve recently announced a strategic minority investment enrolling energy resources and EV load management software provider as part of our effort to be the leading solution to EV load management to utilities and consumers. We believe this innovative area of our business will help facilitate the transition to the next generation grid. And ongoing policy support remains a potential tailwind as regulators and policymakers increasingly recognize the value of flexible digital solutions to the challenges facing on evolving power grid. We continue to expect gross sales from residential energy technology products and services to deliver between $300 million and $350 million for the full year 2023. Operating expenses as a percentage of sales are expected to be elevated in 2023, as we continue to build a home energy technology foundation for growth, to position our combination of hardware and software solutions for long term success. With new leadership running this part of our business, our teams are focused on more deeply integrating the product and platform we've acquired over the past four years with an eye towards tightening our focus on the solutions, where we believe we can create the most value for the consumer as part of the residential energy ecosystem. With improved focus and execution, and by leveraging our core competencies around sales and marketing, lead generation distribution, customer support, and global sourcing and logistics, we believe we can create competitive advantages with our residential energy technology products and services that will become evident over time as we continue to develop the Smart Energy home in the future. Switching gears and I want to provide some commentary on our C&I products, which have experienced significant growth over the last few years, and once again outperformed our expectations in the quarter. Global C&I product sales grew 30% over the prior year to an all-time quarterly record. And backlog for these products also remained at record levels at the end of the quarter, as multiple megatrends support demand for backup power and mobile products around the world. Shipments for domestic C&I products grew in the first quarter highlighted by strength across all channels, including national rental equipment, industrial distributors, telecom and other direct customers for beyond standby applications. Shipments of C&I generators to our North American distributor channel grew significantly again in the first quarter. An order trends and channel backlog also increased at a strong rate. Quoting activity remains robust and close rates improve nicely on a year-over-year basis, highlighting our sustained market share gains and the ongoing strength and demand for backup power in this important channel. As a leading provider of backup power to the North American telecom market, shipments to national telecom customers also increased at a robust rate during the first quarter as compared to the prior to strong prior year comparison, as several of our larger national customers continue to deploy generators to harden their existing sites and build out their fifth generation 5g networks. While shipment in order patterns for certain customers in this channel are expected to be lumpy in the second half of the year, investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand, and the increasingly critical nature of wireless communications requires backup power for resiliency. We also experienced another quarter of tremendous growth for our national and independent rental equipment customers, as they continue to refresh and expand their fleets. This end market is supported by the secular trend of critical need for significant infrastructure investments that will require years to complete. And mobile power products and light towers will be necessary in these essential construction projects. Natural gas generators used in applications beyond traditional emergency standby projects also continue to see increased traction during the first quarter as shipments of these products once again grew at an exceptional rate. We believe we are in the very early innings of growth for this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand from these solutions. Additionally, the business models of our direct customers in this vertical are innovating the generator marketplace, by developing as-a-service offerings which dramatically reduces the need for the large initial capital outlays that have traditionally been required for businesses to add resiliency to their operations. Internationally, robust momentum continued as shipments increased 17% year over year during the first quarter, with 19% core sales growth when excluding the net impact of contributions from acquisitions, and the unfavorable impact of foreign currency. Core total sales growth was driven by strength across key regions, most notably in Europe, where power security for homes and businesses remains a top priority amid ongoing geopolitical and macroeconomic uncertainty. International segment EBITDA margins also increased meaningfully during the quarter, primarily due to favorable price cost dynamics, and improved operating leverage on higher sales volumes. Supplementing our international performance, we're also beginning to see long-term growth potential emerge in new and developing regions, such as India, where we're experiencing positive sales momentum for our backup power solutions. This rapidly growing market has unique characteristics for a developing country with the size of its population, broad electrical infrastructure coverage, and an increasing number of homes and businesses with direct natural gas connections. We are currently building out our full range of residential and C&I gas solutions to address this large market opportunity. Additionally, during the quarter, we acquired the remaining 20% minority ownership interest in Pramac, bringing our total ownership to 100%. Pramac is a leading designer and manufacturer of stationary mobile and portable generators, along with energy storage solutions sold through a broad distribution network across the world. And it has been a key driver of our successful international expansion, since we first acquired a majority interest in the company in early 2016. Through the combination of focused investment, and Pramac global presence, this has become an important strategic element of our international growth aspirations. As we've been experiencing on the residential side of our business, our global C&I product category is similarly in the very early innings of its own energy technology evolution, and we've made meaningful parts progress towards that evolution here in 2023. In addition to our advanced controls and connectivity solutions, beyond standby natural gas generators and mobile energy storage systems, we've now added stationary energy storage solutions for behind the meter applications, both domestically and internationally to our product portfolio. In February, we acquired REFU Storage Systems, a German based developer and supplier of energy storage hardware products, advanced software, and platform services for international, commercial, and industrial customers. We also recently announced our new series of Generac branded stationary energy storage systems for the North American C&I market, in partnership with a leading supplier of behind the meter storage solutions. These developments represent our initial foray into this rapidly growing market, and advancing our C&I storage capabilities will remain a key initiative for Generac in the coming years. The long-term opportunity for energy technology solutions within our C&I product categories is extremely robust. And I'm confident in our ability to leverage our existing positions of strength around the world to compete in these markets. In closing this morning, we believe our first quarter performance represents a trough in the current cycle, as we continue to focus on reducing home standby fuel inventory levels. And as we work to rebuild sales momentum for our power sell residential energy storage systems. That said, we're extremely pleased with the continued execution in our global C&I product categories that drove overall results ahead of our prior expectations. And we're encouraged by the progress we're making in addressing the near term challenges that are impacting our residential product categories. In addition, the robust level of power outage activity and resulting strength in home consultations for home standby generators so far here in 2023, provides incremental support for our expectations to return to year over year sales growth in the residential product category in the second half of the year. Importantly, we're maintaining our full year net sales and adjusted EBITDA margin guidance, as we execute on our near term initiatives, and position Generac for sustained long-term success in our mission to lead the evolution to more resilient, efficient and sustainable energy solutions. I'd now like to turn the call over to York, to provide additional details on first quarter results, and discuss our outlook for 2023. York?

Thanks, Aaron. Looking at first quarter 2023 results in more detail. Net sales decreased 22% to $888 million during the first quarter of 2023, as compared to $1.14 billion in the prior year first quarter. The combination of contributions from recent acquisitions, and the unfavorable impact from foreign currency had an approximate 2% net favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class, residential product sales declined 46% to $490 million as compared to $777 million in the prior year. As Aaron discuss in detail, lower shipments of home standby generators and power cell energy storage systems growth this decline in residential product sales. Commercial and industrial product sales for the first quarter of 2023 increased 30% to $363 million as compared to $279 million in the prior year quarter. Contributions from recent acquisitions were nearly fully offset by the unfavorable impact of foreign currency during the quarter. The very strong core sales growth was broad based across most regions internationally, and all channels domestically, with particular strengths in domestic national rental equipment, industrial distributors, telecom and other direct customers for beyond standby applications. Net sales for other products and services increased 32% to $106 million as compared to $80 million in the first quarter of 2022. The acquisition of electronic environments contributed approximately 28% of this growth given their additional service capabilities. Core sales growth for the category was approximately 4% primarily due to growth in our energy technology service offerings, along with continued growth and aftermarket service parts and extended warranty revenue recognition. Gross profit margin was 30.7% compared to 31.8% in the prior year first quarter, due to the significant impact of unfavorable sales mix, given a sharp decline in home standby mix compared to prior year. This is mostly offset by realization of previously implemented pricing actions together with lower input costs from improved commodities, logistics, plant efficiency and other cost reduction efforts. Operating expenses increased $22 million or 11% as compared to the first quarter of 2022. This increase is primarily driven by higher marketing, promotion and employee costs, certain legal and regulatory expenses and the impact of recurring operating expenses from recent acquisitions. Adjusted EBITDA before deducting for non-controlling interest as defined in our earnings release was $100 million, or 11.3% of net sales in the first quarter as compared to $196 million and 16.3% of net sales in the prior year. The lower EBITDA percent was primarily driven by the higher operating expenses as a percent of sales, given the lower sales compared to the prior year. I'll briefly discuss financial results for our two reporting segments. Domestic segment total sales, including intersegment, sales decreased 26% to $720 million in the quarter, as compared to $975 million in the prior year. With the impact of acquisitions contributing approximately 3% revenue growth for the quarter. Adjusted EBITDA for the segment was $68 million, representing a 9.4% margin as compared to $170 million in the prior year 17.5% of total sales. The lower domestic EBITDA margin in the quarter was primarily due to unfavorable sales mix and reduce operating leverage on lower shipments. In addition, the impact of acquisitions, and continued energy technology growth investments negatively affected margins during the quarter. These factors were partially offset by the realization of previously implemented pricing actions and lower input costs. International segments total sales including intersegment sales increased 17% to $216 million in the quarter, as compared to $185 million the prior year quarter. Core sales which excludes the impact of acquisitions and currency, increased approximately 19% compared to the prior year. Adjusted EBITDA for the segment before deducting for non-controlling interest is $32 million, or 15% of net sales, as compared to $26 million, or 14% of sales in the prior year. This margin increase was driven primarily by favorable price cost dynamics and improved operating leverage and higher volumes. Now switching back to our financial performance for the first quarter of 2023 on a consolidated basis. As disclosed in our earnings release GAAP net income for the company in the quarter was $12 million, compared to $114 million for the first quarter of 2022. The current year net income includes approximately $13 million of additional interest expense in the prior year due to higher borrowings and interest rates. GAAP income taxes during the current year first quarter were $8 million or an effective tax rate of 35.7% as compared to $29 million or an effective tax rate of 19.7% for the prior year. The increase in effective tax rate was primarily due to a lower benefit from equity compensation on a lower pretax earnings base in the current year quarter. Diluted net income per share for the company on a GAAP basis was $0.05 for the first quarter of 2023 compared to $1.57 in the prior year. Adjusted net income for the company, as defined in our earnings release was $39 million in the current year quarter, or $0.63 per share. This compares to adjusted net income of $128 million in the prior year or $1.98 per share. Cash flow used in operations was negative $19 million as compared to negative $10 million in the prior year first quarter. And free cash flow as defined in our earnings release was negative $42 million as compared to negative $37 million in the same quarter last year. The modest decline of free cash flow was primarily due to lower operating earnings and a $36 million one-time cash tax payment for tax planning related to a recent acquisition. This was mostly offset by lower working capital investment in the current year quarter as we reduced our material receipts and production rates for residential products and stabilized inventory levels. Total debt outstanding at the end of the quarter was $1.61 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 2.25 times on an as reported basis. Outstanding debt increased $179 million during the current year quarter, as we use proceeds from those borrowings to fund the $105 million Freddie Mac buyout, the $36 million one-time cash tax payment for tax planning purposes, and a $60 million REFU Storage acquisition. With that I will now provide further comments on our outlook for 2023. As disclosed in our press release this morning, we're maintaining our prior outlook for the full year 2023. We continue to expect the residential product category will be impacted by higher home standby field inventory levels in the second quarter, before returning to year-over-year sales growth in the second half of the year, resulting in a full year decline in the high teens range compared to the prior year. Our outlook for C&I product sales to grow at a mid to high single digit rate during the year remains unchanged as we come up against increasingly challenging prior year comparisons in the second half of the year. As a result, we continue to expect overall net sales for the full year to decline between minus 6% to minus 10% as compared to the prior year, which includes approximately 1% to 2% favorable impact from acquisitions and foreign currency. Importantly, this guidance assumes a level of power outage activity during the remainder of the year. That is in line with the longer term baseline average. Consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year. Additionally, this outlook does not assume a prolonged, deep recessionary environment that meaningfully impacts consumer spending during 2023. Having said that, demand for our home standby products tend to be driven more by power outages, rather than overall macroeconomic conditions. We continue to expect sales to be more weighted to the back half of the year as field inventory normalizes and consistent with normal seasonality excluding excess backlog. With overall net sales in the first half now being approximately 45% weighted and sales in the second half being approximately 55% weighted. Our gross margin expectations for the full year 2023 are also unchanged, as we anticipate approximately 150 basis points of gross margin improvement over 2022 levels. For the seasonality perspective, we continue to expect our first quarter gross margins will mark a low point for the year. We anticipate sequential quarterly improvements resulting from improved sales mix, with higher shipments of home standby generators, along with lower input costs, improved overhead absorption, and realization of cost reduction initiatives as we move throughout the year. Gross margins are expected to progressively improve throughout the year, with second half of 2023 gross margins to be approximately 500 basis points higher than first half 2023 margins. The continued strength our end markets gives us the confidence to continue to focus heavily on supporting innovation, executing on strategic initiatives and investing for future growth. As a result of these continued investments, we expect operating expenses as a percentage of net sales, excluding intangible amortization expense to be approximately 20% for the full year 2023 with operating leverage improving throughout the year. Given these gross margin and operating expense expectations, adjusted EBITDA margins before deducting for non-controlling interest, are still expected to be approximately 17% to 18% for the full year. From a seasonality perspective, we expected adjusted EBITDA margins to improve significantly throughout the year, primarily driven by sequentially improving gross margin that was previously discussed, and to a lesser extent improve leverage of operating expenses on the expected higher sales volumes in the second half of 2023. Accordingly, we continue to expect second half adjusted EBITDA margin to be approximately 800 basis points higher than first half margins. We're also providing updated guidance detail consist with modeling adjusted earnings per share and free cash flow for full year 2023. For 2023, our GAAP effective tax rate is expected to be approximately 25% as compared to our previous guidance of 24% to 25%. And the 19.6% full year GAAP tax rate for 2022. The year-over-year increase is driven primarily by expectations for lower share based compensation deductions, increased mix of high income and higher tax jurisdictions, and higher tax and foreign income in 2023 compared to 2022. Interest expense is still expected to be approximately $90 million, assuming no additional term loan principal prepayments during the year. And assuming elevated SOFR rates throughout 2023. Interest expense is expected to moderate in the back half of the year, as cash flows and our interest rate swaps become more favorable, and we pay down a portion of our outstanding revolver indebtedness. Our capital expenditures are projected to be approximately 3% of our forecasted net sales for the year. Depreciation expense is now forecast to be a proxy $60 million compared to the previous guidance of $56 million to $58 million in 2023, due to the addition of REFU storage related depreciation expense. Gap, intangible amortization expense expectations are unchanged at approximately $100 million during the year. Importantly, to arrive at appropriate estimates were adjusted net income and adjusted earnings per share, this add back items should be reflected net effects using the expected 25% tax rate. Stock compensation expense is still expected to be between $40 million to $43 million for the year. Operating and free cash flow generation is expected to follow historical seasonality are being disproportionately weighted towards the second half of the year in 2023. For the full year, we expect adjusted net income to free cash flow conversion will be strong at well over 100% of working capital levels moderate off peak levels. Our full year weighted average diluted share count is still expected to decrease to approximately 63 million shares, as compared to 64.7million shares in 2022, which reflects the share repurchases that were completed in 2022. Finally, this 2023 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

[Operator Instructions] First question will come from Tommy Moll Stephens Inc. Your line is open.

Good morning, and thanks for taking my questions. Aaron, it's good to hear some of the constructive updates on IHCs in the period. And on a related topic, I wanted to talk about the close rates there. Can you update us on what those looks like? Maybe compared to the prior year or pre pandemic? And as you progress through the year, do you see it landing somewhere in the range of a pre-pandemic kind of level? Or is there something structurally different here? Thank you.

Yes, thanks. Thanks, Tommy. We actually, were very encouraged by the sales lead volume that we saw -- as we said, in Q1, it was, in fact, it would have been a record Q1, if not for the copying, the last record Q1 was 2021, when we had Texas, the deep freeze, so if you take that out, Q1 would have been a record for consultations. Just for the baseline. Yeah. So I mean, it was it was pretty robust. And in fact, that carried through here in April as well. Close rates, interestingly enough, like, we've talked about this previous call. So we're still well off our pre pandemic, close rates, but those they have been recovering, they kind of bottomed beginning of last year, so about a year ago. So from a cost perspective, we're up nicely off those close rates from a year ago. As far as do we think will recover to pre pandemic levels by the end of this year, we've still got a ways to go, we continue to see progress. And we think that, a big part of that story, as we've mentioned previously, is just getting the lead times back down, which clearly isn't an issue anymore. So, the thing we'll watch, of course, with close rates is there’s a softening economy, potentially in the back half of the year, how does that impact close rates? You know, we are seeing as just as a side note there, we're seeing continued uptake in our financing options for homeowners. In fact, we had incredible growth on our financing program in Q1. And that's in spite of, you know, the residential category being down 46% financing was up dramatically in the quarter. So we do know that there are consumers out there that are looking at financing, as an option as a way to improve the affordability of these products, in spite of maybe their concerns around a slowdown in the economy. So, again, not giving specific guidance on the close rates, but we are continuing to see improvements there kind of sequentially, or at least over the prior year. And I don't think that we'll return quite to pre pandemic levels by this year. I don't think that that's not what our guide contemplates. So, maybe that's upside for us as we continue to recover there.

Thank you. One moment please, for our next question. Our next question will come from Michael Halloran of Baird. Your line is open.

Good morning, everyone. So, let's stick on that train of thought Aaron, because obviously there's a lot of concern and questions just around the sustainability of that home standby piece from an underlying demand perspective. And, we've certainly seen the positive or heard certainly heard the positive commentary on the IHC side. Would love to understand why the confidence level is so high that you can maintain that and also maybe put in historical perspective how you've tracked when you had kind of negative economy, but positive storms in the past, I know New York made a quick reference to it in the prepared remarks. But you know, just kind of laying out why you think things are going to be, from an underlying perspective, pretty stable, moving into the back half would be great.

Yes, that's obviously an area of deep focus for us, Mike. And we've got some experience around that. And I'll pop these out here in a second. But I think just talking to the trends, and what gives us confidence the second half of the year. So the way we think about it, those sales leads, which are important leading indicator and a category for us, they mature over a period of 90 to 120 days call it, from when you do the consultation to when the product actually gets installed. So we think that in terms of near term visibility, right, next quarter, quarter and a half, perhaps, we think we have a pretty good view on the kind of the end market demand as it were. That coupled with the fact that we're under serving the market right now, right, like we're under shipping to and market demand, because we're allowing this destock process to take place. So I would just say that, Q1, artificially low, relative to what home standby shipments could have been, had we been matching kind of the shipping pace with the demand pace, right. So we were out of step with that, because of the field inventory challenges that we've talked much about here. So you put those together, and those we're pacing to have that debate, as we enter the second half of the year. We think that that's something that's going to improve, as we said, we're going get back to more normal levels there. So we return to more normal levels there, you also have normal seasonality, right, the first half of the year, Q1 in particular, is always a challenging quarter for the category because it's just difficult to do installations. In fact, this Q1, some of the reasons why we saw so many home consultations with the outage environment, being driven by weather also provided some challenges to our installed crews in terms of them being able to actually install product in Q1. So it was a little bit of a kind of a bit of an irony there. But so take that out of it, though, and we look to the future. And then kind of just Speaking more broadly, I think, to our experience in the category, when you have maybe a softening economic backdrop, I can point to the last kind of pullback economically back in 2008 2009, when you look at housing in particular, and I would say I would argue this rest this recessionary, I got to be careful the term I use, but the slowdown in the economy right now that we're -- that people are concerned about or experiencing is not necessarily the same type of experience that happened in ’08 ‘09. Well, it's directly related to housing prices, home values, mortgage, obviously, the value of your home relative to your mortgage, with housing prices kind of collapsing back then. And if there was ever a time, when you think that like, what we get pegged at in this category, we pegged as a big ticket discretionary item, right, tied to residential investment, you would have thought that would have been the worst environment ever, for this category back in ‘08 ’09 we actually grew our residential part of our business back then. So, and I -- there's a bunch of reasons for that. I mean, first of all, the category goes to older right, so 65% of the buyers of the category are over age 60. And so I don't want to say they're insulated necessarily from economic pullbacks. But I would say that they probably are less affected. I also mentioned, the use of our financing tools, we're seeing an increase in use of the financing tool. So I think we have some things today that help homeowners who are still interested in the category shop the category and still become buyers. And I think the biggest thing over my time here, almost three decades of the company, is that power outages, Trump the economy every day of the week. I mean, when your power's out, the generator categories go right to the top of the list, we maybe get reshuffled, maybe that kitchen remodel or that new pool you were thinking about, or even a family vacation gets further down the list. And a generator becomes the priority in terms of what you're going to spend your discretionary income on, or your home, -- put value in your home into home equity infusion. So anyway, that's just kind of how we think about it largely. And I think why I think the category has been relatively resilient over the last three decades.

Thank you. One moment please for our next question. Our next question will come from Jeff Hammond of KeyBanc Capital Markets Inc. Your line is open.

Hey, good morning, guys. Just, can you quantify maybe how much inventory you think came out of the channel in 1Q and what you think that number looks like in 2Q? And if I could just sneak in a commercial one, just what prevents you from kind of raising the bar there, given the strong start? Thanks.

Yes. Thanks, Jeff. All good questions, I think on the field inventory, the way we describe, it was a meaningful decrease in the inventory numbers there. That was really the big thing to look at and we've mentioned this before the days of field inventory, right. So we mentioned, I think, in the third quarter, last year, we were about double where we thought we needed to be. That was kind of, and we made progress down to about 1.7 times, when we got to kind of the Q4 call here in February. Now we think that range is somewhere in the 1.4 to 1.5 times, kind of “normal”. There's some debate about what normal means. But we're looking at our history, in the categories, and we're making good progress. That's all in line, we also said it wasn't going to be a linear pull down here. Because of the seasonality, primarily the way Q1 works, just installs being normally seasonally lower in Q1, we just knew that it wasn't going to kind of linearly dropped from 1.7 to 1.35 to one times at the end of Q2. But we feel like we're progressing right where we want to be. And again, we're buoyed by the fact that we see the end market demand remaining very robust. So we feel like this is going to be, we're going to get to where we need to get to there, down the line. Now, I would just say the reason you kind of point out, why didn't why not take up kind of the guidance based on the outperformance in Q1. The outperformance primarily came from C&I. So our C&I business was crushing it, which is awesome, especially internationally Pramac team, we were able to acquire now we own 100% of that business, which is awesome. And they've been a significant part of our global expansion here as a company over the last seven years. But that said, one of the big kind of drivers, one of the verticals in there that we've always talked about is our telecom business. And we are seeing some lumpiness in kind of the back half of the year relative to some of our channel partners there, right, we serve all the major wireless telecom companies, as well as the co-locators in the marketplace. And a couple of those accounts for us, we've delivered a lot of products, and they've got to get that product installed now. So they're working through, they got --, so that maybe pulled some of that in is what it maybe looks like. But all indications, as we talked to them about their CapEx spending and kind of what they need to do to harden their networks going forward, as they think about the next generation technology or fifth generation 5g technologies. They're all -- this is a secular cycle right now for telecom, in terms of CapEx spending and building on networks. And so we think it's just, kind of just the lumpiness that we see from time to time. And that's really why we didn't take up the guide in the back half. It's really related to that. That's kind of a simple answer. There's some moving pieces underneath that. But that's, that's really it.

Thank you. Our next question will come from Christopher Glynn of Oppenheimer, your line is open.

Thank you. Good morning, guys. I wanted to ask about the -- you mentioned the home consultations for HSP were up significantly in almost all the states. So I want you to dive into that a little bit. And then also clarify the expectation for residential growth in the second half. Does that explicitly include growth in 3Q? Or if not, are you biased in that respect to see least a bit of top line positive from resi in 3Q?

Yes, thanks, Chris. Maybe just I'll address that first. Yes, we are seeing a return to growth starting in the third quarter. So that is the expectation and the way we've met the guidance around residential. More specifically, to the commentary about home consultations, being very broad based, right. Almost all states, I think, what was really encouraging again, and this, this is what I think is different from kind of pre pandemic periods to today. And as you may recall, we mentioned that just consultations in general up dramatically from that pre pandemic, pre pandemic period, you know, almost really more in 4x off of that base. And I think when you when you step back, and you look at that kind of pre pandemic fit today, it is the broad based nature of that growth that's really encouraging for us and I think speaks to just again, I can't stress enough to where we're at in this journey, this is a category of product home standby generators, still less than 6% penetrated single family, U.S. House is greater than $150,000 in value. Every 1% penetration is a $3 billion market opportunity. And we have 75% share of the market. So when we think about the opportunity ahead of us, and we look at the growth that we're experiencing in states, obviously a couple of examples and also Canada in there as well. So we can talk territories and provinces as well as states, because Canada has been just on fire for us because they have also been experiencing, much as we have here in the U.S. in increasing frequency of outages and the duration of those outages. And I think what's different today from the outages four years ago, and what drove people to category four years ago, is what's causing those outages, whether it's still kind of largely, the cause behind most outages. But I think what we're also seeing, and what homeowners and businesses are seeing is that the grid is struggling to deliver, right. So and what I mean by that is as we race to electrify everything, heating, cooking, cooling transportation, you're seeing demand through seen supply be outstripped by demand. And it happens very rapidly. This was on full display in the Carolinas over Christmas over the Christmas holiday. So utility companies in the Carolinas were struggling to keep up with the demand surge because it got so cold, that everybody turned on their heat pumps and their electric baseboard heaters, which created an enormous amount of demand on the system that was unplanned. And that system had it struggled to keep up with it. So they had to resort to rolling brownouts rolling blackouts in order to keep the system up. And that's the kind of difference I think, between today and four years ago that we look at, and we see as being -- I think a basic part of the story going forward. And I just think, when you talk about the states where we're seeing the most growth, so let's just step back, our top five states from a penetration standpoint, are also our top five growth states, in terms of the penetration rate accelerate highest growth rates. So like, it's not like you get to a point of kind of where you saturated the market in the states, they're continuing to grow. In fact, I would say, you might question whether it maybe there's a tipping point that a state gets to, is it 10% penetrated, and then it accelerates, we definitely have seen evidence over the last several years, that if you just look at the top five states from an emirate standpoint, they are also almost always the top five growth states over time. So it's very interesting to see how this continues to almost the penetration rates continue to accelerate as awareness for the category deepens. And as these challenges around grid reliability, continue to become more apparent to homeowners and businesses.

Thank you. Our next question will come from Mark Strouse of JPMorgan. Your line is open.

Yes. Good morning. Thank you very much for taking our questions. York, I wanted to go back to your comments on pricing, the pricing action, the kind of benefiting gross margin. How broad based of a comment is that is that resi, and C&I. And then kind of what does the guidance imply regarding future price action this year?

Yes, it's, at least for the first quarter it applied for the most across the board. On the resi side, and particularly home standby side, the last price increase that kicked in with June 1 of 2022. So we're still in the process of analyzing that price increase on the home standby side. And then on the C&I side, there were a number of price increases that came through here in the beginning of 2023. We had them in 2022. But there was another round in 2023 that should continue on so. So I'd say more of a price impact in the first half as you as we haven't analyzed the home standby side yet, but still yet some benefit in the back half on the C&I side.

Thank you. One moment, please for our next question. Our next question will come from the line of Brian Drab of William Blair. Your line is open.

Hey, good morning. This is Tyler on for Brian. So I just want to kind of transition to the clean energy products. And what are you doing there to improve the distribution capabilities? And then a follow up with that, the $300 million to $350 million guide for the full year in clean -- resi, clean energy. Can you kind of give some direction to each of the products like ecobee, power cell and grid services and what their potential is for the full year?

Yes. Thanks, Tyler. So yes, so we're working very hard to rebuild not only the distribution, obviously, to replace the loss of that customer in the third quarter last year but also confidence, right, in the marketplace. I mean we stumbled with execution with this -- one of the companies we acquired that had a component that we've struggled with the overall longevity of that component, and we're going through that upgrade campaign, the SnapRS upgrade campaign that we've talked about at length. And we took the charge for last 3Q making good progress there, by the way. And I would tell you that we're getting high marks from the distribution partners that we're involved with on that campaign in terms of standby products, taking care of the issues. They've seen different OEMs, deal with different issues over the course of kind of the solar markets early days to today, right? Like I mean, a lot of OEMs, I think they can struggle. It's a challenging environment, rooftop-mounted electronics that have a long warranty period and duty cycle that we're constantly running for the most part. So they run a lot. So it's something that we learned a lot doing and I think we're making really good strides rebuilding that. We've got some, I think, some pretty good green shoots that we're excited about there, probably more towards the back half of the year. There was a little bit of field inventory to work through there as well, as you can imagine, with kind of the abrupt closure of that distribution partner in Q3 last year and kind of the way the market kind of ground to a halt for us. We had to work through some of the inventory that was in the field there, too. It wasn't nearly to the same degree as what we had with our home standby business but we're working through that. And that market also has had some, I would say, some jobs lessen right around some of the new rules around NEM 3.0 and waiting for the IRA to be finalized. What does that really mean in terms of what's available for tax credits and things? So as that gets clearer to homeowners and to distribution partners going forward, we see that market continue to recover throughout the year. We're not going to give specific breakdowns on the different pieces, but we can tell you that obviously, ecobee, which we called out specifically in the prepared remarks today, has been doing really well. I mean they are -- their smart thermostat product line is doing great. They're going to be launching a smart doorbell cam alongside of that here in the second half of the year, which we're really excited about. Already being very well received by some of the channel partners that today sell our smart thermostats. They're very excited to carry these products as well. And we've had a couple of nice wins there that will have some placement where we'll do some load-ins in the second half of the year. So we're talking about -- that's a part of the story here in the 300 to 350 guide and then also grid services off of a low base, but a nice rate of growth here in Q1. And we continue to see that growing still again, small base, but there's a lot of discussion with a lot of utilities and grid operators about the importance of meeting these types of digital solutions to help them manage these potential bridge shortfalls that I talked about previously. And they see something like our Concerto platform that is at the heart of our grid services team. They see that Concerto platform as a way to -- just another tool in the toolkit to deal with potential shortfalls in supply when you see spikes in demand. So more to come on all that, but I think we bottomed. I guess it's the message here. We feel like we're going to come off the bottom in Q1, green shoots ahead for those businesses and good momentum in things like ecobee and the good services team.

Our next question will come from Jerry Revich of Goldman Sachs. Your line is open.

Yes, hi. Good morning, everyone. I'm wondering if you could just talk about the fourth quarter margin outlook and maybe just outline your expectations for year-over-year cost declines that are embedded in the guidance within the context of pricing as well as you folks go back towards doing some level of promotions versus not doing them a year ago. Just wondering how much does that pressure price realization? And if we could just bridge how much of the year-over-year margin improvement in 4Q we expect from price cost? That would be helpful, if you don't mind.

Yes. Jerry, this is York. I know we're contemplating that EBITDA margins get back to those low 20% range that we're used to by Q4, as we talked about. Specifically, we talked about at least first half, second half, that EBITDA margin should improve about 800 basis points sequentially, first half, second half with, I'd say, roughly, let's say, 3% of that 800 -- 300 of the 800 basis points just as a function of mix in that home standby as we normalize inventory and seasonally increase first half, second half. Home standby mix is going to improve dramatically relative to the first quarter and first half so you get about 3% improvement in margin just right there, first half, second half. We are anticipating about 2% improvement in just input costs with commodities, logistics, continued improvement there. We've got a number of cost reductions we're working on plant inefficiencies, its better absorption, again, sequentially first half, second half that will improve about 2% of that 800, first half, second half improvement. And then the remaining 3% is really just operating leverage on the much higher sales volumes on our -- leveraging that OpEx infrastructure. So that's really the bridge at least sequentially. Year-over-year, like I said, they'll probably be modest. Most of the pricing will have lapped on a year-over-year basis by Q4. So a lot of that is just more cost improvement and mix improvements year-over-year will drive that as well as -- that will drive most of the year-over-year improvement from Q4 last year to Q4 this year.

Our next question will come from Joseph Osha of Guggenheim. Your line is open.

Thanks very much. I wanted to return to the Residential Clean Energy business a little bit. Obviously, as you go through this reset. One of the questions, I think, that's come up is around the residential home architecture and the fact that you're advancing sort of 2 parallel inverter architectures at the same time, which drives a lot of complexity in the other parts of the system. So I'm wondering if you're able to maybe give us any clarity today or when we might have some clarity in terms of how you intend to move forward with those multiple architectures.

Yes, Joe, it's a great question. We talked a little bit about this, maybe not publicly but maybe one on one with you in particular because I think you've been focused on this space quite a bit, which is great. We've got a brand-new team that's running that business. And we bought a lot of technology and platform over the last four years. And so I think the viewpoint on how best to deploy that technology, the first order of kind of focus, if you will, is integrating as much of it as we can, right? Like I think that is -- we always knew there was a heavy lift coming there with all of the companies that we've acquired. Some of them start up, some of them more at a scale level like ecobee and trying to figure out what is the -- where can we add the most value, right? I think we're a little bit agnostic about which -- if you're speaking strictly about inverter technologies, which inverter technology is going to "win", right? I mean, I don't know that we see this as a VHS Betamax kind of fight as much as we just see it as two different paths to achieve a similar outcome, right? There's just different technologies that are different -- are available. And I do think that it's -- your point about having -- if you have to cover too much ground, if I can just kind of paraphrase it, too much ground that might -- is that really the right way to go? Is that the most efficient path in terms of how much calorie burn we use to support 2 different architectures? I think over time, I think we'll become -- it will become clearer which architectures or which architecture may be the best for us. And this is as we go through and we start thinking about as we have been working on our next-generation storage products, you have to be cognizant though that there's a huge market out there where we want to be able to add storage to existing homes that are already invested in solar. And those homes may have -- they could be DC-coupled, they could be AC-coupled in terms of their architecture from an inverter standpoint. So how do we put that -- how do we make sure that we keep a -- and then we get a product to market that can serve the entire existing solar market. So we're looking at that. And then we know that we need to be in the market or we need to have a product that keeps us in the market for solar only, right? If we just focus on solar plus storage, that's going to limit -- too limiting for us, we believe. Today, attachment rates are 15% to 20%, that's and they're growing, which is great. That still means there's a high percentage of new solar installs that don't have storage being installed. We just we want to participate in that market. So finding a pathway that gets us there and get us there most economically and where we can add the most value is really important. So more to come on that. We do have an Investor Day that we've got scheduled here for September. So I think we'll be prepared to discuss that in more detail in September, but know that the team is continuing to look at that and figure out just exactly strategically what's going to make the most sense for us long term.

Our next question will come from Kashy Harrison of Piper Sandler. Your line is open.

Good morning. And thanks for taking the question. So there's a lot of uncertainty in the market from a banking and financing perspective. Just curious if you could give us a sense of how the uncertain financing environment is impacting operations for your dealer and channel partners? Thank you.

It's a great question. We obviously, you would think that they might be impacted by that, but largely they're not. They pays by credit card, a lot of dealers are they like the points that they accumulate on their American Express and their different card programs. And so we tend to see credit card payments being kind of one big path to paying us. They also use our floor plan financing program very aggressively, and that's been a program that has been a very successful program for us. It allows the dealer to kind of derisk their ability to bring product in. We want to have them have some inventory level, and we have subsidized the cost out for 180 days. Exactly. They don't bear that cost. So it's really our cost for the first 180 days, they get free floor plan financing. So we kind of derisk that for them. So in terms of like their overall direct exposure, we haven't heard much in the way of them seeing any kind of compression. There is more of a project-based business and where they're probably going to see more challenges if housing were to slow down, right? And that's a real risk out there, of course, as we've talked. But in terms of like their projects flow, because they're paid kind of as they go, right, on a progress basis. So if that kind of progress flow or that project flow were to dry up, that's probably where they would feel more pain. But we haven't heard any or seen any evidence directly around that. That is our view.

Our next question will come from George Gianarikas of Canaccord Genuity. Your line is open.

Hi, good morning. And thanks for taking my question. And believe it or not, I actually had a power outage during this call, and I'm not a Generac customer yet. So my question actually just to jump on the previous one with regards to that there's spasms that we're seeing in financial markets. How does that impact your C&I business? How much of it is project-related that we may see some sort of impact if this continues on projects related to renewables?

Yes, that's a great question. Typically, so you want to look at nonresidential construction spending. It's an interesting indicator for us. And I would tell you that business tends to be late cycle, right? So we typically see our res business is more of an early-cycle business in terms of how it reacts to economic cycles, even though as we've mentioned here today, both prepared remarks and on the Q&A, it's probably less sensitive because as power outages happen, homeowners, they react. It's a more emotional category. Although in the C&I side, I think that as non res construction may slow down in the future and that category is late cycle, you could see that breakdown. You have to think about the megatrend, if you step back for a second, telecom has one really major important vertical for us there. As I said in the prepared remarks and in some of the Q&A, very much in a secular up-cycle market here in terms of CapEx spending for the telcos. And so that's a really important vertical for us. The other one is, I think, the -- just the increasing penetration rate of backup power, much the same as what's been occurring in residential, businesses just like yourself, they're struggling with outages, right? Like they're having outages happen more frequently. It's interrupting their revenue streams. It's causing spoilage of inventory or destruction of processes when things are in process, if you're a manufacturer in particular. So we're seeing power backup power being added to businesses that in the past hadn't thought about it as part of their strategy around resiliency, right, or a lot of businesses referred to it as disaster recovery strategies, right? So their DR strategies didn't include backup power or a generator. We're now seeing backup power be added to that. We're also seeing increasing codes and standards that are driving generators as a requirement. We saw in California with the requirement for 48 hours of backup in telecommunications sites. We also are seeing certain states adopt what Florida adopted several years ago in the elderly care spaces and the health care spaces, a requirement that those facilities, those types of facilities have a minimum of 48 hours of backup power. Those are new codes and standards. So you're seeing kind of maybe some of the softness in nonresidential construction spend in the future, I think it's going to be potentially more than offset by the increasing need for resiliency. And some of these megatrends as we refer to them are the secular trends that you're seeing in telecom and in infrastructure spending for that matter.

And on the renewables side, we're not necessarily focused on utility scale or front-of-the-meter project. So any financing breakdowns with those projects wouldn't necessarily impact that.

Our next question will come from Donovan Schafer of Northland Capital Markets. Your line is open.

Hi, guys. Thanks for taking the questions. So I had this thesis going into these results that I was thinking again following all the outage events that the geographic diversification of them in East Coast, West Coast, Canada, even Gulf Coast that could help drive down channel inventory like actually faster than you expected, kind of the logic was maybe there will be a pocket here or there where the labor -- the installation bottleneck would be weaker, and it's kind of like more roles of the dice, if you will, like probabilistically, you get more rolls, these different geographies you might find under the right characteristics. You're pretty clear in the call that the inventory drawdown was in line with your expectations, but also clear that, yes, in fact, based on your analysis, outage activity in aggregate was well above the historical average. So I'm figuring the disconnect there probably comes down to the installation bottleneck and that it is perhaps more uniform than I was thinking. But if you could just kind of like if you have the above-average activity in the first quarter, is it that continuing labor bottleneck that doesn't lead you to having more optimistic outlook for home standby back of generators going into the second or for basically the remainder of the year? If you get that since you're already assuming baseline average kind of your typical outlook, then if we already have some of this, is it just you don't -- there's not really an end in sight on the installation restriction or just kind of what's going on there? And then also just because these were geographically diverse, it'd be nice to just get an update on how they're unfolding because you probably have a clear signal, if you will, from your data. We've got a cluster of events, there's Hurricane Ian, the East Coast ice storms in Christmas, you talked about and you gave some interesting commentary there, the unique nature of it, the Midwest storms, there are the Quebec outages. Just any -- how are those unfolding? Have you seen the demand surge in -- from Hurricane Ian at this point and the installations are happening? I mean that was a long time ago at this point. So just kind of fleshing out that.

Yes. Thanks, Donovan. So I would say your thesis is correct. But I think what you probably aren't appreciating is that there's a time sense there that from when we get a sales lead to when it becomes sales and when it gets installed, there's permitting involved. And again, we've said anywhere between 90, 120 days, and that's down from what it used to be, mainly because that's a longer lead times and the permitting processes were elevated in some markets with COVID kind of driving that elevation or that elongated kind of permitting process. That's -- so it's shorter today than it was, say, maybe a couple of years ago, where it was out as high as 180 days or longer in some cases. So we really got to let those sales leads, right? It's a sales funnel. So they go in at the top of the funnel. And then there's a conversion process and that conversion process takes some time. So we would anticipate that kind of as we exit kind of Q2 and get into the second half of the year, that's going to definitely start reading through. And that's what gives us the confidence around the kind of the second half guide that we're talking about here in spite of maybe the weaker backdrop economically overall. So we feel really good about that. In terms of installation bandwidth, I would just say that Q1 is always a tough install quarter. It's always our lowest because winter weather sets in and you just can't do those installs in Northeast and the Upper Midwest in particular. But what we also saw this year was in California, in Northern Cal, even parts of Southern Cal, the weather was just so aggressive that we just think installers could not get out and get the product on the ground. So we saw those headwinds, which actually created tailwinds for us in the sales consultation and sales leads created some headwinds for us on the installation side. We -- all indications are we're making really good progress on installation bandwidth. That is going to continue to expand. It's expanded every year, by the way. Every year, we've been in this category, it's expanded. So we don't have any reason to believe that we've kind of topped out there. And we -- as we've said last year, kind of after realizing that was a constraint for the first time ever for us, we really kind of refocused our efforts around adding new distribution partners, looking for ways to make them more efficient, improving our product, right? So making it easier to install, helping them hire the talent they need. We stood up something we call our dealer talent network, which is now in full force, and we're helping dealers hire installation crews that they -- one of the reasons they told us they couldn't expand installation bandwidth last year because we couldn't find people. They said, okay, let's figure out how we solve that together, right? So when we have the kind of scale we have with 8,600 channel partners or 8,600 dealer partners, we can put a lot of effort towards those things and they can have kind of meaningful outcomes. So I think we're making all the right things happen. And I think what your thesis maybe just didn't take into consideration is the time line around kind of letting those sales leads mature into kind of installation. So that's coming, and we expect to see that kind of as we exit Q2 and enter the second half of the year.

Our next question will come from Praneeth Satish of Wells Fargo. Your line is open.

Thanks. I know you talked about eco being the single pane of glass, but I guess it's somewhat limited in terms of what it can actually display. So I'm wondering with the smart doorbell that you're launching later this year and HSB being integrated, is there a thought of maybe upgrading the display and processing capabilities of ecobee and having it really compete in the smart home with Amazon and Google and the like?

Yes, absolutely. Great question. One of the great things we love about ecobee is the display is fantastic in that thing. In fact, with the doorbell cam, I have one in my house on a beta trial right now. If somebody pushes your doorbell, if you have -- if you're anywhere near your ecobee thermostat and you can have that thermostat anywhere in your house, you can have multiple thermostats. It actually displays the doorbell camera on the thermostat. It's cool. It's cool as hell, really. I mean, I got to be honest, it's like -- it is one of the more cool features of the ecobee device. It's one of the reasons why I think this is a really key point and I'll make it that you give me the opportunity to do that. We want to use it as the central hub for energy in the home, right? So we want to use it -- I mean, we're going to use it, obviously, for the doorbell cam. But the ability to as we just did, we integrated, if you have a Generac generator in your home and you have an ecobee thermostat, your ecobee thermostat will tell you if your generator -- it will show you on the screen, on the display. It will tell you any fault messages you may have. It will tell you when it's running in exercise mode. It will tell you when it's running during the power outage. It will show you the status of that generator. We're going to be integrating our tank utility, which is our LP tank monitoring device into that next. Then we're going to look at our water heater disconnect switches and integrate those next. Other energy devices like our storage device are on -- also on the docket to be integrated into the ecobee thermostat. Our premise here has been that people looked at us and said, well, why did you buy ecobee back in December of '21. You're going into HVAC thermostat, no, we need a hub in the home, right? Only less than 6% of homes have a home standby generator and even smaller percentage have storage solar and storage. But almost every home has HVAC, right, the nice ones anyway. And every home has a thermostat. So the opportunity, just the raw opportunity for us to enter the home with a device that's low cost and it has a tremendous amount of power inside of it. In fact, Stuart Lombard, who is the principal and the founder of that company would tell you that effectively, that's like your iPhone mounted on the wall in terms of the display quality, in terms of the processing power, the memory, they're fantastic, too. If you use that product and you use the app that is with the product, their -- the user experience is tremendous. Their user interface is intuitive, it's easy to use, and it's smart, right? Like the sensors understand where you are in the home, they can react in terms of your presence in the home, their ability to sense your presence, their ability to save you energy is well documented by installing one of these thermostats. So we just really like the product and we like the user experience. And we think that having it be the central part of our single-pane-of-glass strategy is incredibly important going forward.

The next question will come from Jordan Levy of Truist. Your line is open.

Just a quick one for me on the M&A side. I just wanted to get a sense of after closing some of these recent deals, what segments your appetite might be directed towards as we move through the year and how you view the current opportunity landscape for M&A?

Yes, Jordan, thanks, and thank you for hanging out. This is -- the call has been long, but glad to be able to take the question. We've been very active on the M&A front over the last decade and acquired 30-plus companies here now in total. As we've really grown, not only grown on geographic presence through those acquisitions, but our presence into adjacent spaces. And then also, as we've gone through -- and as we think about the evolution into an energy technology company going forward. And it's been very rewarding. We've learned a lot. Not all the deals have worked. Some have worked better than others. But I would tell you that we find ourselves in a much different position today than when we were only growing organically, right? We have never done an acquisition prior to our first one in 2010. As far as what we're thinking about in the future for acquisitions, we're still going to be active in this space. You've seen us do a couple here little bit more bolt-on in nature, adding some pieces like the Rolling Energy Resources acquisition, the investment we made there was really around trying to add to enhance the Concerto platform, right, around EV management EV charging management. The REFU Energy Storage acquisition that we did over in Germany was about C&I energy storage on a stationary basis. We had done off-grid energy last year or year before summer before, and that was over in the U.K., gave us a great product portfolio to go after really primarily the rental channel with those types of products. But we knew that the C&I stationary market is a market that we've got also go after. And so REFU Storage was a way for us to enter that market. We're going to continue to look at, I think, as the energy technology space continues to evolve and in particular, there are a couple of notable areas where I think we still have -- I don't want to say gaps is not as much as I say, opportunities to accelerate our entry, EV charging, right? We're going to get to market with an EV charger here later this year on the residential side. But it's -- honestly, it's a private label effort. We're partnering with somebody. It will be unique to Generac, but we believe an organic effort there, longer term is what we need. So maybe something in that space, valuations have just been really high and remain high in that space. So we've gone after it a little bit differently, but should that picture change, we could become active there. And then on the C&I side, and then maybe anything internationally, you think about some of the things that we've done on the residential energy technology side as well as the C&I energy technology side, we were to find additional pieces that might fit internationally on the residential side. That's an area like we don't really have an energy storage product for anything outside of North America at this point. So if there's a way for us to enter the markets in Europe or other markets through an acquisition that might be something to look at. And then also, just looking at acqui hire, we've done a couple of -- where we acquired a couple of development companies to help us with accelerate our acqui-hire environment. Obviously, maybe the picture has changed on the tech employment base here with some of the bigger firms pulling back, and maybe that's not going to be as challenging to hire people as it had been in the last couple of years. But we continue to look at the environment, things kind of come and go. Opportunities are put in front of us time and again, but we're going to remain active on that front.

Our next question will come from [indiscernible] Credit Suisse. Your line is open.

Good morning. Thank you so much for taking the question. Just stepping out of the quarterly cadence here. Within the residential clean energy space, we've seen a lot of company announcements are on bidirectional chargers. How are you thinking about the effect of vehicle-to-home on home standby demand in the medium term, say, three to five years? And as you sort of alluded to in your prepared remarks, through a lot of acquisitions, you have many parts of the home-energy puzzle in your clean energy business. Could you kindly contextualize your in-house and/or M&A-based EV charging ambitions beyond the level two announcements that you've made?

Yes. No, great question. And obviously, we watch -- we're watching with great interest kind of the EV penetration rates. Fundamentally, I do think that EVs, look, they're a large battery that for most people are going -- you're going to be charging at home, right? So you're going to have an EV charger in your garage or carport and you're going to want to plug that vehicle in, of course, to charge it. And as its sitting there charging, I think that the ability to control the rate of charge, the time of charge is going to be really critical. Now you can do both of those with a level two charger today and some level of integration with some home energy management type of system. By directional charging, of course, would indicate that you're going to be able to use that battery for some other purpose, either to export power to the grid or perhaps use it for resiliency purposes. I do think that at least in the medium term, the three- to five-year window, we don't see much of an impact on the EV and bidirectional charging opportunity on home standby generators. I think it's much, much longer term as EV pen rates become more ubiquitous and perhaps as homes go from having a single EV to maybe two EVs, and the reason for that, in my view, is fairly simple. I don't think that homeowners are going to be willing to trade resiliency for mobility. I just -- I think, flat out that you're going to want to have some level of stationary storage or perhaps backup power available at your home for outages -- for long-duration outages in particular, a generator is going to be the way to solve that. In fact, what we're seeing and what we may see near term and perhaps even long term, depending on how people view mobility and resiliency and how they feel about that, I think that generators actually could see some level of increased interest once you buy an EV because I think your mindset goes to, okay, if my power is out, right -- first of all, bidirectional charging by the way, is a -- it's a new technology. It is a somewhat unregulated space relative to the codes and standards around it. And there's also a fairly large open question as to whether the OEMs -- the auto OEMs, how much control will they give a third party with control of their basically their battery, right? And in terms of what does that mean for the warranty of that battery in terms of the charge cycles, the discharge cycles, charge rates, discharge rates. That is a fairly open question at this point. I do think it will get resolved over time. And so to that end, we're putting quite a bit of an effort towards EV charging beyond just the level 2 charger. We've got some organic efforts internally here with design teams that are looking at the space to understand how do we want to approach it beyond the level 2. I think that the first thing -- the first order of business for us is getting our own level 2 charging structure and infrastructure put together and then integrating that deeply into home energy management. So that what we can do there is to help the homeowner manage the charging of that vehicle. And that has benefit for not only the homeowner in terms of the cost of what it may talk -- what it may take to charge that vehicle, but also in terms of the local utility or grid operator because they are the ones who are going to struggle the most as people add EV charging capability to their homes, there's a pretty difficult upgrade cycle coming on the hard infrastructure. The lines, the poles, the transformers that serve those local neighborhoods where EV charging is being implemented. Those are very heavy draw loads. I mean, that's a pretty significant energy draw at the home. And in fact, in some cases, can double the home's electrical use just by adding an EV charger. So I think there's a lot to come on that. We're going to unpack that a little bit more when we get to the IR day in September, but great question and an area of great interest for us going forward.

That will end the Q&A session. I would now like to turn the conference back to Mike Harris for closing remarks.

We want to thank everyone for joining us this morning, and we look forward to discussing our second quarter 2023 earnings results with you in early August. Thank you, again, and goodbye.